On Wednesday, FT Alphaville published a rather scathing retort by Iberian Equities analyst Iñigo Vega to Variant Perception’s Spanish bank report .
Vega argued Variant’s August 18 piece entitled “Spain: The Hole In Europe’s Balance Sheet” — saying Spanish banks were hiding their losses — was simplistic at best and irresponsible at worst. The full account can be found here.
It was only fair to offer Variant Perception’s Jonathan Tepper a right of reply. He has provided us with a response on the proviso we publish the whole note, adding it will be his last as “Iñigo Vega and Iberian Securities [sic] are not Paul Krugman and we are not Niall Ferguson.”
Here follows the beginning portion of his 2,475-word retort — the bolded bits are quoted selections from the Iberian Equities’ note.
Variant Perception is very reluctant to get into public argument with someone we don’t know, but the issues facing Spain are large and serious.
We find it amusing that Iñigo Vega and Iberian Securities felt the need to issue a counter to our report. Variant Perception has written repeatedly about Spain for the last year and a half. Its conclusions have been far more accurate than those of Spanish analysts. We are an independent research house and express our views as we see things. What is interesting is that since the report came out, Spanish bank managers, surveyors, and developers have sent emails and come out of the woodwork to agree with us.
The report has struck a chord with readers because they know the emperor has no clothes. It seems only Spanish banking analysts are still blind. Interestingly, Iñigo Vega and Iberian Securities make few macroeconomic observations. We would be curious to know if Iñigo really thinks his loan loss assumptions make sense. Does he think this downturn is a normal downturn and does he feel he really has a grasp of the problems? How does he think the more than one million empty homes will be sold in a slow and orderly basis over the next few years? Who will buy them when affordability in Spain is so terrible and unemployment is above 20%?
Tellingly, he doesn’t even comment on the macro questions facing Spain. Sell side analysts engage in steady state thinking, but the world doesn’t stay the same. US housing analysts had very little macro understanding. They didn’t realize that house prices can go down, and they can go down a lot. In the case of Spain, he doesn’t once mention deflation, unemployment or why Spain will not suffer horrendous pains as it can’t simply devalue the peseta to get out of this crisis. That is why equity analysts have been so useless for the last two and a half years.
Spanish banks are sitting pretty, with high interest margins. Analysts must ask themselves how much of this is due to the fact that many commercial and residential loans were tied to Euribor with 12 month resets. Borrowers have been paying in at 2008 rates with high Euribor, while banks have been able to fund themselves for next to nothing. What will happen now that borrowers will get lower rates with a lag, and if the global green shoots rebound happens, Spanish banks might have to fund themselves at higher rates. The mind boggles.
This will be the last response, as Iñigo Vega and Iberian Securities aer not Paul Krugman and we are not Niall Ferguson.
And on a point by point basis:
Spain is Japan 2.0 – Not a bad start
We’re not sure what his point is here. He says that comparing Spain to Japan is “not a bad start,” but then goes on to make the very brave and foolish statement that Spanish banks have higher cumulative new NPLs than other developed markets. True, but beside the point. The question isn’t whether Spanish NPLs are high relative to other developed countries, but whether Spanish banks are indeed recognizing losses relative to what losses really are in Spain.
Loan loss ratios are being under-declared. ADICAE, the Spanish banking consumer watchdog, agrees with me and explains how they do it. They are highly credible, independent and respected in Spain. They’ve done a far better job on tracking down ponzi schemes, abuses in the banking sector than the Bank of Spain or the CNMV have done. ADICAE highlights a variety of practices, not least the debt-equity swap. If he cares to read the article and speak to them, he might find it illuminating.
The president of the Association of Users of Banks, Cajas and Insures (ADICAE), Manuel Pardos, affirmed today that the data offered by the Bank of Spain on delinquencies of the Spanish credit institutions “are very distant” from reality, since banks are resorting to all sorts of “tricks and cons” to “put makeup” on thier accounts and reduce their non performing loans.
The argument that Spanish banks are like Japan is not only that Spanish banks are not recognizing all their losses. It is also that by providing capital to the weak, Spanish banks are not providing capital to other companies that desperately need it. That is how businesses are choked by lack of liquidity and financing. Also, by owning large amounts of property, which is by its very nature illiquid, Spanish banks are constraining their balance sheets. If he wants to understand the loss of liquidity caused by lending to zombie companies and keeping illiquid securities on a bank’s balance sheet, he can read the following editorial in Spanish by Daniel Villalba, an economics professor in Madrid at the Universidad
470 billion euros in loans could go bad
We take his point on infrastructure spending. However, he states, “The report forgets to mention- however- that a chunk of the €323bn in outstanding loans to developers does not necessarily involve residential lending but commercial lending (which is relatively safe in Spain , in our view).” Really? How does he know? How does he think deflation, unemployment will not affect commercial lending?
His loan loss assumptions for residential mortgages are not dire enough. According to Expansion and the Bank of Apin 1 in 5 mortgages is at danger of becoming delinquent. We are curious: would he agree with that?
Iñigo states in the introduction to the piece that residential real estate prices can go down 40%, but he thinks 50-60% Loan to Value (LTV ratios) are good. Does he not think banks may be forced to dispose of residential real estate at levels below their fair value in order to move inventory?
Iñigo states that LTV ratios are fine for builders at 50-65%. That would be news to many smaller builders with political connections in the regional cajas. Even public builders had higher ratios than that. Colonial’s were closer to 75% before it went bust. Taking comfort in 50% LTV ratios is ridiculous. Martinsa Fadesa was 50% when it went bust. Its books had many irregularities, so its values were bogus. As values go down, LTVs deteriorate very quickly. Metrovacesa is a classic case in point after banks took it over, LTVs suddenly shot up. Loans are known and fixed; values are a moving target. Welcome to deflation.
To read the whole uploaded document, click here.